1. Field of the Invention
The present invention relates to systems and methods that include mechanisms for facilitating international trade and investment involving conversion of currencies.
2. Discussion of the Background
Mutual Funds
As presently recognized there is a growing market for international, financial and wealth management products that can be conveniently accessed and combined with xe2x80x9cneeds basedxe2x80x9d collateral services. Small business and individuals continue to recognize the benefits and low cost entry of investing, as well as traveling and conducting international business transactions. In response, many developed and emerging market countries have relaxed regulatory barriers to incoming and outgoing capital flows.
As a result, the demand for well-structured, pooled investment products is likely to accelerate, due to many macro-economic and political factors. These include, firstly, the trend to restructure welfare and retirement programs to place more reliance on investor directed plans and less on state managed programs. A second important factor is the growth of developing countries. As countries relax their barriers to capital flows in order to become more competitive in attracting international capital, local markets are expanding at a rapid pace. With this expansion comes growing wealth and a demand for professionally managed investment products wrapped with fee based investment, or financial planning services. Due to their structure, mutual funds are natural investment vehicles for local investors in these markets.
Offshore Investment Funds
Conservative estimates put $5 trillion in banks, mutual funds, and trusts in the world""s international offshore banking centers. These centers have no or low taxes, flexible regulations, and, quite often, strict secrecy laws designed to attract capital. As the economy has gone global, corporations have increasingly used these centers to stay competitive, making them especially attractive for money market mutual funds and bank sweep services. Valued at $2.4 trillion, offshore funds now account for almost half the mutual funds sold worldwide, with their chief selling point being higher-than-average yields.
As a result, most of the major mutual fund groups in the U.S. and Europe either have or are in the process of developing a family of offshore funds. Typically, they are cloning existing domestic funds, and wrapping these products with various collateral services, such as check writing on money market mutual funds, daily sweep services, or free exchange amongst a xe2x80x9cfamily of funds.xe2x80x9d
U.S. Financial service companies seeking to expand market share in Europe, or elsewhere, understand that without a proper distribution strategy, their initiatives will fail. Distribution options include building a captive sales force, xe2x80x9crentingxe2x80x9d an established channel, forging an alliance with a foreign investment manager to cross-distribute products, buying a foreign distribution channel and/or investment manager, or xe2x80x9cgoing direct.xe2x80x9d Each of these options has its own characteristics and concerns, but perhaps the most difficult is direct distribution. Gaining access to an existing source of distribution is by far the most desirable method, although cost is a key consideration. Many consider that the easiest part is deciding the correct product type or investment style. However, these financial service companies understand that product structure and design, including management, other fees, and its supporting technology are extremely important in ensuring maximum competitive advantage and profitability for their offshore financial products. For example, the typical fund group will build on its domestic product strengths, whether equity or fixed income funds, or global, regional or single country funds. Innovation beyond this limited scope is typically not the mandate for busy fund company executives.
Administrative and technological considerations are often overlooked until late in the development process, although it is understood by the financial institutions offering these products that they are extremely important for certain products. In fact, it can be the deciding factor in selecting a particular jurisdiction, because of time zone problems or the quality of accounting or transfer agent systems of a particular fund Administrator. Many fund Administrators serving the offshore market are now establishing subsidiaries in at least one location within the three offshore regions of Europe (preferably in a UCITs qualifying EU country), the Caribbean and the Asia-Pacific region. Beyond mutual funds products which require relatively sophisticated systems and experienced agents include mortgage-backed securities, commodity funds, funds investing in LDC debt and bank loans, limited partnerships with complex allocation structures, hedge funds, funds qualifying as passive foreign investment companies and funds requiring retail transfer agent capabilities. In addition, the regulatory authority may require that certain functions are performed within the domicile, thereby eliminating it as a viable option for certain types of funds if the most experienced agents are located elsewhere.
Currency Facilities and Foreign Exchange Services
The beginnings of a common European market goes back several decades but had not moved markedly until the early 1990s. The European Community has given way to the European Union (EU). And the development of a single currency for the 250 million residents of the EU, the Euro, has created a pressing need for financial and investment products that can serve the needs of the Continent""s small-to-medium-sized business market.
There is not a market, as we know it, for currencies, but rather an informal network of trading desks at investment houses, multi-national corporations, and commercial banks. Currency prices are based on certain assumptions, including trends in trade data, interest rates, and political developments.
Until recently, spot currency trading was dominated by major institutional Dealers and Brokers. With the advent of Electronic Dealing Systems (EDS,) the major Dealers no longer control price discovery. In fact, the buyer side represented by pension funds, and retail mutual funds, and aided by Foreign Exchange transaction systems, are the new market makers. Consequently, the major players are focusing more on derivative trades to make money. Second, elimination of intra-European currency trade will temporarily reduce overall Foreign exchange volumes by 07-10% in the near future. Third, Internet based spot, currency trading systems are now being aggressively sold to individuals.
As presently recognized, with minimum account balances as little as $3,000.00, five-point spreads, and low commissions per lot and per round turn, inter-bank market exchange fees, this could be as popular as on-line stock trading has become. So the time has arrived to offer these services bundled in a structure that is trusted, convenient, and that brings efficient currency price discovery to the masses. The money market mutual fund structure and credit/debit cards come to mind. It is our observation that traditional sources of foreign exchange for small and medium size business that conduct cross border business transactions, will need to re-align themselves with these obvious trends.
Businesses in the Euro area are changing to prepare for a more competitive environment. The impact of the Euro currency can be detected in a string of events, ranging from the restructuring plans at multinationals such as Germany""s Siemens, to actions such as the takeover of Belgium""s BBL bank by ING of the Netherlands. As the single currency transmits and amplifies competitive pressures across the Euro area, more of the same can be expected. Price transparency and the elimination of foreign-exchange costs and risks will have strategic implications in three main areas in particular: in pricing, in supplier relationships and in internal Organization and investment.
Second, travel and education are enlarging tastes of individuals in the U.S. and all over the continent, but regional differences remain""strong. Even the new xe2x80x9cinternationalxe2x80x9d cuisine finding its way on to supermarket shelves often has a strongly regional flavor: Heinz""s baked bean pizza is unlikely ever to find favor beyond the shores of the British Isles. Without currencies to define boundaries, marketing regions will be less tied to national borders than today, following instead the logic of distribution, or of culture. Northeastern France, for instance, might be lumped with French-speaking southern Belgium rather than with southwestern France, which has more in common with the Basque region of Spain. Jan Kaas, treasurer of Unilever, points out that there are almost no Europe-wide products-even a brand such as Magnum ice-cream, which is marketed in a similar way across Europe, tastes different in different parts of the continent. Those products that are universally adored, such as Coca-Cola or Bruce Willis, tend to be global, not exclusively European.
Firms risk losing a key source of their profitability if their power to charge different amounts in different markets is eroded. Pricing strategy needs care if firms are not to throw away the profits they make through higher margins in some markets than others. For example, in the automotive-parts business, a 1% change in price can translate into a 10-15% change in profits, according to McKinsey and Company, a consulting firm. Lehman Brothers calculates that, if all car prices in the Euro area fell to the lowest levels, the revenues of France""s Peugeot CSA and Renault groups would fall by 12% and 9% respectively.
It is our observation, that it is increasingly difficult to keep customers in the dark on underlying costs associated with goods and services. As communication technology sheds light on everything going on next door, businesses are being boxed in by customers brandishing price lists for particular goods or services found by searching the Internet. The foreign exchange cost associated with the sale or purchase of goods and services will make or break many small and medium size businesses that depend to a large extent on cross border business transactions. It is also unlikely, that high net worth travelers will continue to tolerate excessive foreign exchange fees on their credit cards, if there were a reliable, alternative.
Credit and Debit Card Systems
In conjunction with these developments are the exponential growth of credit and debit cards, and the implications that this type of financial product will have on world capital flows in the near term. Today, consumers are demanding safe, secure access to their money anytime, anywhere and new applications of technology are making it possible to accommodate these consumer demands.
Integrated circuits enable multi-application, multifunction cards that the bank can use to protect and expand its retail and business customer relationships. At the same time, expanded networks that offer connectivity through remote delivery channels, such as telephones, cable television, and satellites, are supporting the expansion of card usage beyond the store and into the home, office, car and plane. The migration of transaction activity toward these new access options, which are chosen by the consumer (business or retail), rather than by the bank or merchant, is transforming the point of sale into the point of interaction. Industry projections indicate a continued shift towards the convenience of plastic. The bank of the future, including its debit or credit card, will be built on many applications, with needs being defined by the consumer.
FIG. 1 shows how transactions involving currency conversion are employed in transaction-based payment systems, such as credit card systems. As shown in FIG. 1, a variety of different entities are included in the xe2x80x9cauthorizationxe2x80x9d and xe2x80x9cclearing and settlementxe2x80x9d processes associated with employing a transaction payment system that requires currency conversion. A user 1 communicates a purchase request message to a transaction terminal 3. This may occur as a local point of sale such as at a merchant""s cash register. Alternatively, it may occur via mail order/telephone order, e-commerce-exchanges, or automated teller machine (ATM) transactions. The purchase request is then forwarded by the transaction terminal 3 in the form of an authorization request message (part 1) to a host processor 5. The host processor 5 is a local financial institution, for example, but could also be a third part processor such as a merchant or MOTO, like First Data Corporation. The purpose of the authorization request (part 1), is for the host processor 5, which has a xe2x80x9clocalxe2x80x9d relationship with the operator at the transactional terminal 3, but does not otherwise have a relationship with user 1 to relay the authorization request, as part 2, to an authorization system 7. This authorization system solicits information from the issuer of the card used by user 1, from the issuer""s authorization system 9, perhaps through an optional request message to that issuer, or through internal records kept within the authorization system 7. The authorization system 7 includes networks such as MasterCard""s Bank Net, Visa""s VisaNet, or Europay""s-EPCNet, for example. These authorization systems 7, are proprietary networks that operate within an intranet environment, not directly accessible by users 1. The authorization systems 7 are responsible for dispatching an accept/deny message to the host processor 5 that will ultimately be relayed to the transaction terminal 3 so that the transaction between the transaction terminal 3 and user 1 may be completed. However, after the transaction has been completed a relatively significant time delay exists from the time that the transaction is completed until the time the settlement process has finished.
Moreover, after the user 1 walks away from the point of sale, the transaction terminal 3, is then responsible for submitting transaction information in the form of drafts or electronic draft captures (EDC) to the host processor 5. The host processor 5 then gathers and accumulates different drafts and EDCs, and sends them (perhaps over the course of days) in a remittance/settlement request to the payment association network 11. The payment association network 11 performs the operation of clearing the transaction, making a conversion from one currency to the next, presumably at a preferred conversion rate, and makes the appropriate deposits within the associated settlement accounts. On average for US transactions, the internal communication settlement, management and clearing process performed at the payment association network 11 takes over two days to complete. In other parts of the world it may take substantially longer. Subsequently, at the conclusion of the settlement process, the payment association networks 1I disperses settlement messages to the issuer authorization system 9 and host processor 5.
As presently recognized by the inventors, the above-described system, does not provide the user 1 nor the transaction terminal 3 with real-time, or even nearly real-time information regarding particular conversion rates. Over the course of several days, conversion rates may change dramatically, and as a consequence the purchaser cannot be precisely sure exactly how much a particular transaction actually cost, because the conversion between currencies happens well after the transaction. Furthermore, the structure and operation of the system shown in FIG. 1, is based on a fairly ridged signaling mechanism provided by the different international authorization, clearing and settlement systems. The payment associations describe these process flows in detail for their members.
With regard to clearing and conversion, wholesale rates are used to convert transaction currency to U.S. dollars. These rates may be adjusted upwards by as much as 3% at the discretion of the payment association and the bank issuing the card. For example, based on conversations with bank customer service representatives, People Bank adds 1% while ATT Universal Card adds 3% to the wholesale rate.
Transaction Flows
The MasterCard International and Visa International authorization systems are similar in function and can be described generically as follows. They are international message processing systems that serve all of the association""s members: large and small, automated and non-automated. The systems transmit authorization validation data among issuers, acquirers, and points of interaction (merchant point of salexe2x80x94POS, ATMs, telephone, Internet, etc.).
The systems are composed of telecommunications networks that link each association""s members and the association""s data, processing centers, interface processors and software. The association""s interface processors are communications processors that are located at an association member""s facility, or at a processor site. The interface processors provide access to the association""s telecommunications network.
Clearing and Settlement Systems
The MasterCard International and Visa International clearing and settlement processes (CSP) are similar in function and can be described generically as follows. Issuers and acquirers participate in clearing to exchange transaction data and participate in settlement to exchange funds. The issuer is the institution that issues MasterCard and/or Visa cards to cardholders. The acquirer is an association member that has agreements with merchants to accept card transactions from merchants and to reimburse merchants for those transactions. Clearing is the process whereby association members send records of payment transactions among participants to their respective association. The sending member sends transaction data to the association""s central operations center and the association processes the data as they are received and distributes the data to the appropriate member(s) during several clearing cycles. The processing of these financial transactions is through the association""s clearing systems. Settlement is the process of exchanging funds. The associations effect the exchange of funds each day on behalf of members for the net value of the financial transactions cleared for that day. Settlement funds represent the net monetary value from clearing processing. The processing and exchanging of funds is through the association""s settlement system.
Deficiencies of Mutual Funds, Foreign Exchange Facilities, and Credit/Debit Cards
The present inventors have identified that institutions that offer retail or institutional financial products and services, including mutual funds, foreign exchange, and credit/debit cards to high net worth individuals and small to medium size business, have failed to recognize the additional applications inherent in their financial products and thus have produced xe2x80x9csystemsxe2x80x9d that are presently incapable of offering xe2x80x9creal-time price discoveryxe2x80x9d for all interested entities. The present inventors have identified that institutions that offer retail or institutional financial products to high net worth individuals and small to medium size business, have failed to recognize that by not offering new applications for existing financial products supported by known, technologies, they are limiting the channels of distribution through which their products are offered. Traditional applications include investment advice, daily sweep services, check writing, lending, and currency exchange.
There are numerous factors as to why the existing systems are deficient, and why they have not been addressed at the board rooms of financial service companies.
Many of the major financial service companies that control market share for financial products, are publicly owned, and, as such, are more concerned about quarterly profits than what the consumer of their services might need or want. For example, the recent spate of Initial Public Offerings for mutual fund investment management companies, has enabled these companies to use stock xe2x80x9ccurrencyxe2x80x9d to acquire their competitors. Very little attention has been paid to turning themselves into broad-based financial services company at the product level.
Financial service companies reward their employees for sales, not innovation or invention. In addition, compensation packages at major insurance companies and banks have not been comparable to the same at major brokerage and mutual fund companies.
Thanks to the eight-year bull market, senior and mid-level executives at leading financial service companies have been rewarded to such an extent that there is no incentive to invent.
The cultures of major financial service companies that have been traditionally service oriented, are not sales oriented, and financial service companies that have been traditionally sales oriented are still not service oriented although they pretend to be. Inventing new products requires an environment that fosters both cultures. This brings to mind various xe2x80x9cwrap fee,xe2x80x9d financial consultant, and financial advisor programs fostered by major brokerage firms. Although firms like Merrill Lynch have aggressively pushed these programs, the turnover of their financial consultants has been extremely high.
In the last ten years, there has been an explosion of financial service products, creating a mind-boggling array of choices. People began to invest in mutual funds because it was too difficult to pick individual stocks on their own. Now, there are more mutual funds than individual stocks. The advent of investment planning has grown out of this problem, creating another layer of expense for the average investor.
The Internet, and various low-fee, on-line financial databases and services have exploded in the past two years. As a result, major brokerage firms have been forced to cannibalize their full service brokers, by offering the same services at a lower cost to their customer over the Internet.
Financial services companies have failed to recognize that they are essentially technology companies, and that their competition is companies like Microsoft, not other banks, brokerage, insurance or mutual fund investment companies.
Eventually all or most financial products and services will be sold and maintained over the Internet.
Technology companies have done a better job in providing consumers with needs based services associated with their financial and investment needs, giving end users greater flexibility, and control. Quicken Deluxe comes to mind.
Technology is dictating innovation and invention, not corporate policy. Take for example Motorola. They are now describing themselves as a software company rather than a telecommunications hardware company. Technology was responsible for the creation of Instinet, an after hours trading desk. The Internet provided the platform for E*Trade, a popular, Internet based discount brokerage company. On the trading side, OptiMark, a system that allows for anonymous stock price discovery directly between the buyer and seller has been facilitated by the increased usage of electronic communication systems, by xe2x80x9cbuy sidexe2x80x9d pension and mutual fund managers.
Credit card companies such as MasterCard or Visa are associations that are dominated by a handful of major commercial banks that prefer to drive innovation for their own businesses. They prefer that the associations provide minimal product development because of their fear that it would benefit their competitors.
An object of the present invention is to address the above and other identified limitations with conventional system and processes. This and other objects may be accomplished with the present invention, which includes a central-based universal financial management/translation mechanism that offers individual users, small businesses and others, the opportunity to leverage competitive market forces in the currency trading arena, offered as a real-time account-feature for transactions conducted through the centrally oriented universal financial management/translation mechanism.
The inventors have created a new type of financial management account system and method that integrates brokering and dealing, offshore investment funds, credit or debit card access, and low fee currency exchange. Initially this system and method combines a multi-currency money-market fund (open end investment company or unit trust), and a U.S. growth, equity fund, both tied to easy-to-use payment card access or virtual (computer-based) access. Subsequently, this system and methods may be licensed to any other type of open-ended investment company or unit trust, or licensed to any other type of cash deposit account offered by any financial institutions. The central mechanism provides European businesses (for example) with unparalleled convenience, money management and low fee currency exchange. A feature is to integrate and combine three, financial servicesxe2x80x94investment management, credit/debit cards, and a faster, cheaper, alternative currency facility, into one seamless, Financial Management Account system and method.
This service is accessible over the Internet on a password-protected basis, or encrypted link basis, for statements, transactions and trading tools. Small and medium size businesses and individuals (with high net worth, or even more modest means) with a high quality, will have convenient and cost-competitive product that will satisfy their daily investment, travel and business transaction needs. Individual account holders will also have access to the currency conversion features, for performing the operation of converting currencies in sales transactions between respective businesses, as a trading and investment tool, an intermediary in international negotiation processes using different currencies, currency conversion features by way of financial institutions, for example. State of the art systems developed by global payment card associations (e.g. MasterCard, Visa and JCB) and systems in use by private transaction processing companies (e.g. BISYS, FDC, EDS, may be employed as assets of the system and method of the present invention). These systems will ensure the viability of the Financial Management Account to the end users.